United States District Court, D. Connecticut
RULING ON PLAINTIFF’S MOTION FOR SUMMARY
R. Underhill, United States District Judge.
dispute arose from an alleged agreement for Tarpon Bay
Partners, LLC (“Tarpon Bay”) to acquire common
stock shares of Zerez Holdings Corporation f/k/a Definitive
Rest Mattress Company, n/k/a Smart Cannabis Corp.
(“Zerez”) pursuant to a promissory note. The
purported agreement broke down and Tarpon Bay filed this case
asserting three causes of action against Zerez: specific
performance (count one); declaratory judgment (count two);
and breach of contract (count three). See Am.
Compl., Doc. No. 61. In response, Zerez asserted eleven
counterclaims against Tarpon Bay, Southridge Advisors II, LLC
(“Southridge”), and Stephen Hicks
(“Hicks”) (together, “counterclaim
defendants”). Counterclaims, Doc. No. 73 at 7-30.
Specifically, Zerez asserted: breach of implied contract
against Tarpon Bay (counterclaim one); declaratory judgment
against Tarpon Bay (counterclaim two); breach of fiduciary
duty against Southridge (counterclaim three); usury against
Tarpon Bay (counterclaim four); rescission against Tarpon Bay
(counterclaim five); fraudulent inducement against all
counterclaim defendants (counterclaim six); mistake against
all counterclaim defendants (counterclaim seven); aiding and
abetting and civil conspiracy against all counterclaim
defendants (counterclaims eight and nine, respectively);
violations of California Unfair Competition against all
counterclaim defendants (counterclaim ten); and violations of
Connecticut Unfair Trade Practices Act (“CUTPA”)
against all counterclaim defendants (counterclaim eleven).
See Counterclaims, Doc. No. 73.
Bay seeks summary judgment on all three of its claims against
Zerez and all twelve of Zerez’s affirmative defenses.
See Mot. Summ. J., Doc. No. 75. Further, the
counterclaim defendants seek summary judgment on all eleven
of Zerez’s counterclaims against them. Id.
Zerez also filed a motion to strike an affidavit from Hicks.
See Mot. to Strike, Doc. No. 85. I held oral
argument on May 23, 2019 and took all motions under
advisement. For the following reasons, Tarpon Bay’s
Motion for Summary Judgment (doc. no. 75) is
denied in part, denied as
moot in part, and denied without
prejudice in part. Zerez’s Motion to Strike
(doc. no. 85) is denied.
Motion for Summary Judgment (Doc. No. 75)
Standard of Review
judgment is appropriate when the record demonstrates that
“there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of
law.” Fed.R.Civ.P. 56(a); see also Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 256 (1986) (plaintiff
must present affirmative evidence in order to defeat a
properly supported motion for summary judgment). When ruling
on a summary judgment motion, the court must construe the
facts of record in the light most favorable to the nonmoving
party and must resolve all ambiguities and draw all
reasonable inferences against the moving party.
Anderson, 477 U.S. at 255; Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986); Adickes v. S.H. Kress & Co., 398 U.S.
144, 158–59 (1970); see also Aldrich v. Randolph
Cent. Sch. Dist., 963 F.2d 520, 523 (2d Cir. 1992)
(court is required to “resolve all ambiguities and draw
all inferences in favor of the nonmoving party”). When
a motion for summary judgment is properly supported by
documentary and testimonial evidence, however, the nonmoving
party may not rest upon the mere allegations or denials of
the pleadings, but must present sufficient probative evidence
to establish a genuine issue of material fact. Celotex
Corp. v. Catrett, 477 U.S. 317, 327 (1986); Colon v.
Coughlin, 58 F.3d 865, 872 (2d Cir. 1995).
when reasonable minds could not differ as to the import of
the evidence is summary judgment proper.” Bryant v.
Maffucci, 923 F.2d 979, 982 (2d Cir. 1991); see also
Suburban Propane v. Proctor Gas, Inc., 953 F.2d 780, 788
(2d Cir. 1992). If the nonmoving party submits evidence that
is “merely colorable”, or is not
“significantly probative”, summary judgment may
be granted. Anderson, 477 U.S. at 249–50. The
mere existence of some alleged factual dispute between the
parties will not defeat an otherwise properly supported
motion for summary judgment; the requirement is that there be
no genuine issue of material fact. As to materiality, the
substantive law will identify which facts are material. Only
disputes over facts that might affect the outcome of the suit
under the governing law will properly preclude the entry of
summary judgment. Factual disputes that are irrelevant or
unnecessary will not be counted. Id. at
247–48. To present a “genuine” issue of
material fact, there must be contradictory evidence
“such that a reasonable jury could return a verdict for
the non-moving party”. Id. at 248.
nonmoving party has failed to make a sufficient showing on an
essential element of his case with respect to which he has
the burden of proof at trial, then summary judgment is
appropriate. Celotex, 477 U.S. at 322. In such a
situation, “there can be ‘no genuine issue as to
any material fact, ’ since a complete failure of proof
concerning an essential element of the nonmoving
party’s case necessarily renders all other facts
immaterial.” Id. at 322–23; accord
Goenaga v. March of Dimes Birth Defects Found., 51 F.3d
14, 18 (2d Cir. 1995) (movant’s burden satisfied if he
can point to an absence of evidence to support an essential
element of nonmoving party’s claim). In short, if there
is no genuine issue of material fact, summary judgment may
enter. Celotex, 477 U.S. at 323.
dispute between the parties arose from a purported agreement
for Tarpon Bay to acquire Zerez common stock shares.
Generally, Tarpon Bay alleges that it is entitled to a
certain number of shares pursuant to a contract formed
between Tarpon Bay and Zerez. See generally Am.
Compl., Doc. No. 61. Zerez alleges generally that Tarpon Bay,
Southridge, and Hicks behaved in a way during the alleged
formation of the agreement that precludes the enforcement of
any purported agreement. See generally
Counterclaims, Doc. No. 73.
Bay is a limited liability company “organized under the
laws of the State of Florida.” Tarpon Bay Rule 56(a)(1)
Statement of Undisputed Facts (“56(a)(1) Stmnt”),
Doc. No. 76 at ¶ 1. Zerez alleges that Tarpon Bay
“holds itself out to provide business consulting
services.” Counterclaims, Doc. No. 73 at ¶ 4.
Southridge is a Connecticut limited liability company, and
Zerez alleges that Southridge “renders financial
services to clients” and specializes in “direct
investment and advisory services to small and middle market
companies.” Id. at ¶ 5. Hicks manages and
owns both Tarpon Bay and Southridge. Counterclaims, Doc. No.
73 at ¶¶ 4-6. Zerez is a “corporation
organized under the laws of the State of Oklahoma with
headquarters in Roseville, California.” 56(a)(1) Stmnt
at ¶ 2. Zerez is a publicly traded company (previously
traded under “ZRZH”, now “SCNA”) that
“invests in, manages, and owns emerging companies and
technologies.” Counterclaims, Doc. No. 73 at ¶ 3.
parties became acquainted in roughly January 2016. 56(a)(1)
Stmnt, Doc. No. 76 at ¶ 8. At the time, Zerez alleges
that it had over $500, 000 in liabilities and “was
seeking to reduce its liabilities and raise new capital to
fund operations and growth.” Counterclaims, Doc. No. 73
at ¶ 15. The way the parties connected, however, is in
dispute. Zerez alleges in its counterclaims that it was
frequently receiving “‘cold calls’ from
venture capitalists, fundraising brokers, or financial
advisors offering to provide financial services … in
exchange for stock” and in January 2016, Zerez received
a cold call from Anish Aswani of Southridge. Id. at
¶¶ 16-17. Zerez alleges further that, in the cold
call, Aswani “offered to provide financial advisory
services to Zerez … [and] failed to disclose that he
was working for Hicks … [and] that Hicks was involved
in litigation” with the SEC and the state of
Connecticut for fraud related to securities transactions.
Id. at ¶ 17. Tarpon Bay, however, disputes that
it (or someone connected to it) “cold called”
Zerez but, instead, asserts that the parties were connected
“through a third party familiar with both companies
that had recommended to Zerez that Tarpon might be able to
assist Zerez in reducing its carried debt[.]” 56(a)(1)
Stmnt, Doc. No. 76 at ¶ 10.
the parties agree that Zerez and a counterclaim defendant
engaged in discussions around January 2016 “regarding a
prospective transaction in which [Tarpon Bay or another
party] would purchase debts owed by Zerez to various
creditors and then obtain court approval for [Tarpon Bay or
another party] to receive Zerez common stock in exchange for
retiring the purchased debts.” 56(a)(1) Stmnt, Doc. No.
76 at ¶ 8; Zerez 56(a)(2) Statement of Facts
(“56(a)(2) Stmnt”), Doc. No. 84-14 at ¶ 8.
Tarpon Bay alleges it was engaged in discussions and
negotiations with Zerez, Zerez alleges it was Southridge via
Aswani. Id. Nevertheless, the parties agree that the
proposed agreement would exempt from registration the common
stock received in exchange for retiring the debt, pursuant to
section 3(a)(10) of the Securities Act of 1933. Id. One
of the purposes of the proposed transaction “was to
reduce the carried debt on Zerez’s balance sheet,
making it a more attractive candidate for future investors
and lenders.” 56(a)(1) Stmnt, Doc. No. 76 at ¶ 9;
56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 9.
about January 15, 2016, the parties executed a Liability
Purchase Agreement Confidential Term Sheet (“Term
Sheet”). Id. at ¶ 12; Id. at
¶ 12. The Term Sheet provided that Tarpon Bay would
purchase and retire up to $1, 000, 000 of outstanding
liabilities held by Zerez’s creditors. Term Sheet, Ex.
C to Hicks Decl., Doc. No. 77-3 at 2. The Term Sheet further
provided that after the retirement of the liabilities, Zerez
would issue to Tarpon Bay shares of common stock
“pursuant to court approved settlement
agreement.” Id. Tarpon Bay was to “seek
court approval for the settlement of the Liabilities through
the issuance of the” common stock shares “within
[five] business days of execution of purchase
agreements” with Zerez’s creditors. Id.
The amount of common stock to be issued was subject to the
following limitations: (1) “up to but not exceeding
9.99% of the total outstanding shares of common stock per
tranche”; (2) shares shall be “sufficient to
satisfy the liabilities”, but not more than necessary
otherwise Tarpon Bay would return any excess shares; and (3)
the shares could not allow Tarpon Bay to own more than 9.99%
of the outstanding shares of Zerez common stock. Id.
Tarpon Bay was entitled to the following fees: (1) a $25, 000
signing fee which would be “due upon the execution of
the term sheet” and was intended “to cover its
expenses including the legal fees”; and (2) a success
fee, a non-refundable commitment fee, which was to be
“equal to the greater of (a) five percent (5%) of the
aggregate amount of the liabilities in the settlement
agreement or (b) $75, 000.00, upon the approval of the
fairness of the transaction by the court.” Id.
at 4. Both fees were to be paid “in the form of a
convertible promissory note, maturing six (6) months from the
date of issuance … [and] shall have no registration
rights [and] shall carry an annual interest rate of 10% and
shall be convertible into the common stock of [Zerez] at 50%
of the low closing bid price for the thirty (30) days prior
to conversion.” Id. at 4. The Term Sheet
provided that the terms “do not constitute a
contractual commitment” between the parties, “but
merely represent[s] proposed terms for possible liabilities
satisfaction”, and “[u]ntil definitive
documentation is executed by all parties, there shall not
exist any binding obligation, other than as described in
‘Exclusivity.’” Id. at 5. Hicks
testified that the “definitive documentation”
statement was “leftover” from a different
agreement and the terms on the term sheet were
“essentially terms of the understanding between Tarpon
Bay and Zerez.” Hicks Depo Tr., Ex. A to Reply in Supp
Mot. Summ. J., Doc. No. 90-1 at 126:24-127:7. The Term Sheet
was signed by Juan Murga, Zerez CEO, and Hicks “advised
by” Southridge. Id.
January 27, 2016, Zerez executed a 10% convertible promissory
note in favor of Tarpon Bay in the amount of $25, 000, in
satisfaction of the signing fee obligation (“Promissory
Note”). 56(a)(1) Stmnt, Doc. No. 76 at ¶ 24;
56(a)(2) Stmnt, Doc. No. 84-14 at 24. The Promissory Note
“contained [a] provision for conversion of principal
and accrued interested thereunder into unrestricted shares of
Zerez common stock.” 56(a)(1) Stmnt, Doc. No. 76 at
¶ 25; see also Promissory Note, Ex. E to Hicks
Decl., Doc. No. 77-5 at ¶ 3. The conversion provision
provides that the conversion price for common stock would be
“at a 50% discount from the lowest closing bid price in
the 30 trading days prior to the day [Tarpon Bay] requests
conversion”, unless otherwise modified, subject to
modifications with respect to the closing bid price on the
date in question. Promissory Note, Doc. No. 77 at ¶ 3.
In the Promissory Note, Zerez agreed “to instruct its
stock transfer agent to reserve at least 500, 000, 000 shares
of Zerez common stock for issuance to Tarpon Bay.”
56(a)(1) Stmnt, Doc. No. 76 at ¶ 25; see also
56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 25; Promissory Note,
Doc. No. 77 at ¶ 12.
Bay alleges that it sought out Zerez creditors who were
amenable to selling their claims and, by the end of April
2016, it had entered into Claims Purchase Agreements with
eight creditors to purchase claims against Zerez in the
aggregate amount of $512, 874.06. 56(a)(1) Stmnt, Doc. No. 76
at ¶¶ 26, 28; see also Claim Purchase
Agreements, Ex. F to Hicks Decl., Doc. No. 77-6. Zerez admits
that it was aware of certain discussions that were happening
between Tarpon Bay/Southridge and Zerez creditors. 56(a)(2)
Stmnt, Doc. No. 84-14 at ¶ 30.
parties agree that court approval was required by section
3(a)(10) of the Securities Act “so that any common
stock issued by Zerez to Tarpon [Bay] as payment for Success
Fee earned in connection with the Claim Purchase Agreement
would be exempt from registration.” 56(a)(1) Stmnt,
Doc. No. 76 at ¶ 31. Tarpon Bay, through its lawyers,
commenced an action on June 13, 2016 in Florida state
court to obtain the necessary court approval.
Id. at ¶ 32. Tarpon Bay alleges, and Zerez does
not deny, that in order for the section 3(a)(10) action to
succeed, Zerez would need to appear via counsel and
“enter into a stipulation with Tarpon wherein the
parties would recite the facts and circumstances leading up
to the stipulation and stipulate as to the fairness of the
transaction.” Id. at ¶ 33; see
also, 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 33.
Tarpon Bay alleges, but Zerez denies, that Murga confirmed
that Zerez had engaged a Florida attorney who would accept
service of the complaint. 56(a)(1) Stmnt, Doc. No. 76 at
¶ 34; 56(a)(2) Stmnt, Doc. No. 84-14 at ¶ 34. As
support for its contention that Zerez did so, Tarpon Bay
cites to an email from Aswani to Murga in which Aswani states
“the complaint for the [Section 3(a)(10) action] will
be filed in court in the next 24 hours. Please let us know
when you have Rick Savage engaged so that he can accept
service of the complaint on behalf of Zerez” to which
Murga responds: “Yes. I have contacted him, he will be
sending me the paper work.” June 13 Email, Ex. G to
Hicks Decl., Doc. No. 77-7.
Zerez’s statement that it was in discussions with
Attorney Savage, he nor any other attorney appeared for Zerez
in the Section 3(a)(10) action, nor did Zerez provide contact
information for an attorney who would accept service on
Zerez’s behalf. 56(a)(2) Stmnt, Doc. No. 84-14 at
¶ 35. Zerez contends Southridge had Savage contact Zerez
and offer to represent it in the 3(a)(10) action, but
required $7, 000, a sum that Zerez did not expect to have to
pay for representation in the action. Zerez Disputed Material
Facts Stmnt (“Disputed Stmnt”), Doc. No. 84-14 at
pg. 11, ¶¶ 25-26. Further, Zerez contends that,
although Murga sent Aswani the June 13 email, Murga was not
advised that he needed to take any further action in order
for the 3(a)(10) action to proceed. Id. at ¶
parties agree that the Florida state court action for the
section 3(a)(10) approval did not proceed, but dispute the
reason. Tarpon Bay alleges that Zerez “refused to
participate” in the action and so the Claim Settlement
Agreements could not be approved and therefore, despite its
efforts, Tarpon Bay never earned the success fee for its
purchase of the Zerez liabilities. 56(a)(1) Stmnt, Doc. No.
76 at ¶ 36. Zerez admits that it never issued a success
fee note to Tarpon Bay (56(a)(2) Stmnt, Doc. No. 84-14 at
¶ 36), but argues that Tarpon Bay failed to commence the
litigation within 10 days of the execution of the Claims
Purchase Agreement and that ...